When running a business, you need to find methods of financing your ideas and gaining the money required to set everything up.
Traditionally, people opt for either bank loans or angel investors as their finance options. However, there are plenty of alternative business finance methods you should be aware of.
Dave Beard, Founder of financial comparison website Lending Expert discusses a few options that are well worth learning more about.
The first option we’ll be discussing is invoice financing. The whole crux of this idea is that someone will agree to buy your unpaid invoices off you, for a set fee.
There are three main types of invoice finance:
Invoice Factoring: This is where you work with an invoice financier (an independent financial company), and they collect debts on behalf of your company. The financier will basically buy any invoice debts your company is owed, and you will receive a percentage of this right away. They then collect the debt from the customer, and you get the rest of the full debt, minus a charge.
Invoice Trading: This method is very similar to the first in that you’re essentially selling your unpaid invoices to different financiers. The main difference is that it’s done online and you can sell them to individuals rather than financial institutions.
Invoice Discounting: Here, you will collect the invoice debts yourself, and the financier lends you money against these invoices. It gives you access to cash when you need it, then you repay the debt once the invoices have been collected.
This is a good method of business finance if you have money tied up in unpaid invoices and need cash immediately. Rather than waiting for customers to pay, you can get some money straight away by using invoice financing.
Asset financing is an interesting way of getting access to specific assets that will help your business improve and grow. Every company will have certain things it may need to invest in to help expand or become more productive. A simple example of this is updated office equipment to upgrade your working environment and improve the way everyone works. A more extreme example is a large industrial machine needed for manufacturing purposes.
Regardless, asset financing involves lending money that you can then use to either buy or lease the assets your business is after. There are three main types of asset finance agreements to be aware of:
Hire purchases: With this type of asset finance agreement, you will pay a deposit and then follow this up with fixed monthly sums for a set period. You have access to the assets, and once the payments are up, they’re all yours.
Leasing: The second type is when a lender buys the assets you need but then leases them to your business. You will then pay a monthly sum to use these assets.
Refinancing: Finally, this method is for companies that already bought assets but want to use the money they have tied up in them. Here, a lender buys your assets then charges a set monthly fee for you to lease them over a period of time. It enables you to still use the assets, but you don’t have money tied up in them and can use the cash they paid you for whatever means necessary.
This is an advantageous business finance option if you need money to invest in assets that will help grow your organisation.
Merchant Cash Advances
This finance option is normally reserved for businesses that make a lot of card sales. Essentially, you’re given a lump sum of cash that you repay based on your credit/debit card sales. The amount you’re allowed to borrow is based on your average sales figures. For example, if you make £20,000 per month in card sales, you can borrow £20,000 worth of unsecured cash.
You will then agree with the merchant cash advance provider that a percentage of all credit/debit card sales will go towards them. This will help pay off your cash advance, and it gets automatically deducted from every single sale. When the whole debt has been repaid in full, then there are no longer any collections, and you go back to normal. Furthermore, many lenders don’t add interest charges or APR’s on their cash advances. Instead, there’s an all-inclusive cost that gets added to the money you borrow. For example, you could borrow £5000, but the additional cost is an extra £2000, meaning the total you repay is £7000.
This is a good method for thriving businesses to access some additional funds right away. You get a merchant cash advance, use it to invest in your business, and contribute regular payments through card sales to pay off the loan.
Crowdfunding is a simple concept; multiple people donate money to your business in exchange for something. Typically, you either promise them a reward of some kind – special discounts on your products, exclusive merchandise, and so on. This is an incentive to get people to invest in your business, and it’s highly popular.
There’s also equity-based crowdfunding which is similar but slightly different. Instead of a reward, anyone that donates money can receive a stake in the business. They benefit by getting shares in a company, you benefit by getting the money you need.
This method can work very well, particularly for new start-ups with a unique idea. The hardest part is finding people willing to invest in your business, which is why a lot of emphases is put on the incentives you provide.
Lastly, this business finance method involves people lending you money, and then you pay it back to them. Terms and conditions are set – such as the length of the loan – and your business will also add interest on top of the loan amount.
There’s not a lot to add to this, it’s straightforward to understand. This is an excellent option if you want to avoid traditional bank loans as the rates are usually much better. The downside is the money you borrow might not be as large of an amount as a bank offers.
These are your alternative business finance options, which one do you think suits your company the most? They all provide you with intriguing ways of raising capital, just make sure you do extra research before coming to your decision.
You can discover more by Conrad Ford @ Funding Options here: https://www.lendingexpert.co.uk/5-alternative-business-finance-options-know/
Written by Jamie McKaye